Commercial Property Insurance: Coverage and Forms

Commercial property insurance pays for direct physical loss or damage to covered property at your described premises caused by a covered cause of loss. A coverage form, usually the Building and Personal Property Coverage Form, defines the "covered property", and a separate causes of loss form (Basic, Broad or Special) defines the "covered causes of loss". Those two forms, plus your valuation and coinsurance choices, decide how much of a claim you recover. This guide shows where the surprises happen.

What does commercial property insurance cover?

Commercial property insurance covers three kinds of property, each with its own limit: your building, your business personal property, and other people's property in your care. The coverage form, usually the Building and Personal Property Coverage Form (CP 00 10), sets what property is insured, while a separate causes of loss form sets which perils are covered:

• Building: the described structure, its fixtures and permanently installed equipment, and property used to maintain or service it.
• Your Business Personal Property: furniture, machinery, stock, your interest in tenant improvements, and leased property you are required to insure.
• Personal Property of Others: other people's property in your care at the premises, covered when a limit for it is shown in your policy.

The 100-foot rule catches many insureds. Business personal property is covered in the described building and in the open or in a vehicle within 100 feet, but not inside another building that is not described, such as a shed, even if it is within 100 feet. Schedule every building that holds your property. Property under construction belongs on a builders risk policy.

What are the Basic, Broad, and Special causes of loss forms?

Every commercial property policy includes a causes of loss form, and the choice decides who has to prove what. Under Basic and Broad, the insured must show that one of the listed named perils caused the loss. Under Special, anything not excluded or limited is covered, and the burden shifts to the insurer to prove an exclusion applies.

The Special Form (CP 10 30) is defined by what it excludes. Windstorm, vandalism, sprinkler leakage and theft can each be removed by endorsement. Flood and earth movement are excluded on all three forms. According to the National Flood Insurance Program, just one inch of water in an average-size building can cause about $25,000 of damage.^[1]

How does coinsurance work, and how does the penalty bite?

Coinsurance cuts your claim payment when you carry less than the required percentage of the property's value, usually 80 percent, at the time of the loss. Owners assume the limit they bought is what a claim pays. Instead, the payment is reduced by a formula known as "did over should": the amount you carried, divided by the amount you should have carried, times the loss.

Underinsurance is common. Marshall & Swift/Boeckh, now part of CoreLogic, has estimated that 75 percent of US businesses are underinsured by 40 percent or more.^[2] Because the test applies at the time of loss, rising construction costs can push you into a penalty mid-term, so review values every year or suspend coinsurance with the Agreed Value option.

Actual cash value vs. replacement cost: which valuation applies?

Actual cash value applies unless Replacement Cost is marked on the declarations. Actual cash value (ACV) is replacement cost minus depreciation, so depreciation comes off every payment. When Replacement Cost is chosen, the policy pays the least of the limit, the cost to replace with comparable property, or the amount you actually spend. Code upgrades still need ordinance or law coverage.

What does commercial property insurance not cover?

The base policy excludes flood, earth movement and code-driven upgrades, and it sharply limits coverage for vacant buildings. The vacancy condition is the one most well-built programs miss. If a building has been vacant for more than 60 consecutive days before a loss, there is no coverage for six perils, including theft, vandalism and water damage, and every other covered loss is reduced by 15 percent. The rule reflects the fire risk: the U.S. Fire Administration reported about 23,800 fires a year in vacant residential buildings from 2013 to 2015, and 34 percent of them were intentionally set.^[3] The Vacancy Permit endorsement (CP 04 50) waives the condition between tenants. Two exposures need their own coverage: lost income belongs to business income insurance, and liability to others to your general liability policy.

If no standard carrier will write your California building, the fallback is the California FAIR Plan's commercial program, a narrower named-peril form with its own vacancy rule. Our guide to the FAIR Plan commercial policy compares it with the forms above.

This guide is for educational purposes and summarizes standard ISO policy language. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.

Checking your property program

Commercial property insurance pays for direct physical loss to covered property at your premises from a covered cause of loss. How much a claim pays depends on the coverage form, the causes of loss form, and your valuation and coinsurance choices. Vacancy and underinsurance are where good programs quietly fail, so pull your declarations, confirm the values reflect today's rebuilding cost, and ask your broker whether Agreed Value and Replacement Cost are in place.